What is Supply Chain Management?

Major mechanism behind the shrinking world is the development global supply

chain networksDesigned to manufacture and move

products to every corner of the world

Logistics infrastructure of the world is underdeveloped

• Few products are able to navigate the complex web of international trade regulations and domestic distribution operations so quickly and seamlessly

The world is smaller but not completely homogeneous

• Differences in culture,economic, political policies, regulations, and physical and climatic charateristics

• Complexities related to supply chain can cause firms great difficulties

• They can also provide an opportunity to establish a strong competitive advantage by learning to manage the issues that trip up other firms

Supply chain management as a field is approximately 25 years old

• However traditional business functions(procurement, forecasting, production, transportation, warehousing, customer service, and order management have been around since business began

• All activities in the supply chain should be undertaken with the customers requirements in mind

• All supply chains ultimately exist to ensure that customers are satisfied

Evolution of Supply Chain Management

• Field of supply chain management has its origins in the giant manufacturing firms of the late 19th century

• It was common for large firms to own many or all of the stages of production

• For instance Ford would own not only a manufacturing facility but rubber plantations,glassworks,railroads,forest,timber,coal and iron ore mines

• Main benefit to complete vertical integration is the degree of control that a firm has over its supply chain operations

As 20th century progressed most firmsfocused on core competencies

• 1960s, the major business functions related to scm such as procurement, forecasting, production, transportation, and warehousing operated independently

• 1970s, firms began to recognize that these business functions depend on each other and started to manage them as a group

• 1980s firms established the link between inbound materials management processes and the outbound physical distribution processes

Development of business enterprise and communications information technology

• Any supply chain that does not perform tasks entirely in one building must have some minimum level of proximity in relation to geographic, organizational, cultural, or electronic characteristics to be effective

• Easiest accomplished through the deployment of information and communication systems

4 major causes of the bullwhip effect

• 1)Demand forecasting updating• 2)Order batching• 3)Price Fluctuations• 4)Shortage Gaming

Misalignment of decentralized decision makers

• Incentives not always aligned with the interests of the supply chain as a whole

• Incentive alignment efforts began with information sharing between supply chain partners

• Popular examples of incentive alignment include buyback agreements,revenue sharing, quantity flexibility contracts

Importance of Supply Chain Management to Executives

• Main reason executives should take notice is that supply chain management can provide a long term competitive advantage

• In fact world class supply chains embody the “holy grail” by reducing a firm’s costs while simultaneously improving customer service levels by increasing the velocity and reducing the variability of goods moving throught the channel

• Hewlett-Packard (HP) specifically considers supply chain issues during the development of new products through a formal process called “design for supply chain” (DfSC). The cross-functional process enables employees throughout the organization to assess opportunities to reduce costs and improve customer service for all of its new and existing products across 30 product lines. From 2001 through 2006, HP realized more than US$100 million in cost savings as a result of its commitment to DfSC.17

• In the early 2000s Whirlpool overcame a conflicting relationship between its supply chain and its sales force and a lackluster Enterprise Resource Planning (ERP) system installation by getting back to basics and focusing on the end customers’ needs. The supply chain managers also talked to Whirlpool’s direct customers (small and large retailers) to gauge their service criteria and tried to build consensus throughout the other departments in the company (especially sales) for the actions that were expected to reconstruct the supply chain. In less than 2 years forecasting errors had dropped by more than 50%, and Whirlpool was delivering close to its target of 93% availability for all of its products. The company also realized direct financial benefits by reducing the working capital needed to finance finished goods inventory by 10% and lowering supply chain costs by a total of US$20 million

• The Febal Group, an Italian manufacturer of kitchen furniture with annual sales of 50 million euros, has implemented an innovative integrated production and distribution planning process that is expected to improve customer service by more than 20% and reduce delivery lead time to customers from 4 to 6 weeks to 2 to 4 weeks.

• Small and medium-sized businesses can benefit from improving their supply chains as well. Malt-O-Meal (MOM) redesigned its supply chain to give the firm enough flexibility to take advantage of new distribution channels and unique customer packaging requests. MOM aligned internal functions such as demand planning and sales and inventory planning and physical distribution, and the firm reconstituted its purchasing organization to include strategic sourcing activities. MOM also invested in supply chain–enabling technology and a leadership development program to build organizational knowledge among its employees. These measures resulted in an increase in sales of 40% (fulfilled with the same amount of warehouse space used in the past), as well as a reduction in order cycle time by more than 2 days.

SCM could also draw executives attention

• With respect to lead-time requirements, product customization, and availability

• As consumers order more and more products from an almost endless catalog offered by ecommerce companies service expectations are bound to increase in the future as well

Consider a restaurant committed to local sourcing of its ingredients

• A delivery truck could break down or become involved in an accident en route to the restaurant.

• The products could be damaged in transit due to poor loading into the truck or shifting within the trailer.

• The local farmer’s crop could be damaged by inclement weather or pests.

• The farmer’s yield could be lower than was predicted, resulting in an overall diminished level of aggregate supply. The commitment to local suppliers can limit the restaurant’s ability to obtain products from other farmers located farther away.

• Ripeness of the produce could be delayed due to a lack of sufficient sunlight.

Variability is inescapable

• Companies can handle this in two ways

• 1)carrying extra inventory• 2)building agility and responsiveness into the supply chain operations

• Firms can redesign their production or service process if they want to achieve agility or responsiveness

• Other strategies include simplifying or rationalizing the number of different product offerings using standard parts and components

Reasons to trade globally

• Most firms in the 21st century have opportunities to globalize each portion of their supply chains

• Reduced material or product costs

• Also companies can access technology or processes that they cannot find domestically

• On the distribution end of the supply chain firms often look to expand globally to increase market share once the domestic market becomes saturated

• Internet technologies have made it easier than ever before for companies to participate in the global marketplace

Sources of complexity in the Global Supply Chain

• Distance and time required to ship materials and finished products allow for more variability to creep into the system

• One way to handle this is to carry more inventory

• One other way is to substitute information and agility

Another complication of global scm

• Customs and borders procedures• Must have appropriate documentation,approvals and licenses

• Another complexity is currency exchange rate fluctuations

• One final complexity concerns the foreign consumer market

Managing Global Supply Chain Risk

• Supply chain can also be affected negatively by irregular events such as natural disasters or human precipitated events

• Must be ready for anything that could possibly occur whether or not anyone thought that it would ever occur

Another source of risk in global supply chain

• Likelihood of product safety concerns

• Consumer product fraud

Firms should examine their entire supply chain to assess vulnerability

• Firms must understand all of the flows that compose its supply chain

• Once the critical operations and relationships

• Have been indentified the firm should estimate the financial and operational impact of a disruption of these critical activities as well as the chance the event would occur

Flexible and agile supply chains

• Postpone final assembly• Standardize products, components, and processes

• Cross training workers• Prioritizing customers and even dedicating supply chains for the most important customers

• Using demand management tools to align demand with supply

• Reducing both geographic and technologic proximity of suppliers and customers

Security Issues in International Trade

• Since 2001 the US has initiated 3 security programs

• CSI• C-TPAT• ISF

Global Sourcing• Make versus buy decision• Whenever a firm decides to outsource an operation to another company the buying firm gradually loses the organizational knowledge to perform that operations iteself

• Case of IBM• Decide what are core competencies and what to give to external suppliers

Total Cost of Ownership• Make versus buy decision should be evaluated on the basis of the total cost of using external supplier and the total cost of producing the component, product or service in house

• TCO represents all of the costs, both direct and indirect company incurs by utilizing a particular source of supply

• Inventory costs related to lead time and safety stock requirements• Costs related to quality inspections and defects• Inbound transportation costs• Importing costs and applicable duties and taxes• Performance and reliability quality attributes of the product or service

• Order cycle time• Delivery frequency and reliability• Purchasing lot size requirements• Willingness and ability to integrate through technology such as electronic data interchange; advanced planning and scheduling systems; and Collaborative Planning, Forecasting, and Replenishment (CPFR®) systems

• Availability of supply when it is needed• Time and effort required to manage the buyer-supplier relationship• Trade credit terms such as offering a discount if invoices are paid within 10 or 15 days

• Financial viability of the supplier

Final criteria, financial variability of the supplier

• Specialized components-buyer may not be able to obtain supply from alternative sources

• Must have alternative suppliers• Many organizations that outsource may not realize the degree of cost savings due to other costs other than purchasing price including inventory due to long lead times, relationship management costs, and quality problems

Global vs Local Sourcing

• Reduced material cost• Access to technology that might not be able domestically

• Some companies have “nearshored” the productions of some products and services back to market closer to the firm’s home operation. They are justified in doing so because of 1)the cost and risk of global sourcing and 2) reemergence of competitive domestic manufacturers

• Global sourcing also may involve ethical or environmental violations

Global Supplier Selection,Management, and Evaluation

•Defining the specifications of the product or service to be procured

• Establishing the exact criteria that will be used to evaluate the candidate suppliers (such as quoted price, transportation cost, payment terms, quality measures, willingness to collaborate, environmental impact, and financial stability)

• Identifying the vendors that meet at least the minimum level of each criterion to remain under consideration as a potential supplier

• Evaluating each remaining candidate supplier and the selection of supplier(s)

Innovative Supply Chain Management Relationships

• Network Orchestrators-takes a product that a customer wants to build and then uses a proprietary network of suppliers and their known capabilities to develop an optimal supply chain

• Supplier Development Programs-invest resources in supplier

• Collaborative Supplier Relationship-work closely back and forth with suppliers

Structuring International Operations

• 1)product customization• 2)ownership structure of foreign operations

• 3)hierarchy of management in foreign operations

Global Transportation Management

• 1)Road• 2)Rail• 3)Water• 4)Air• 5)Pipeline

Pricing of modes of transporation

• Size of the equipment• Characteristics density, susceptibility to damage

• Stowability• Weight• Handling requirements

Road• Usually trucking, most popular mode

• 80% of total spending on freight costs

• NAFTA,EU• Rising fuel costs• Difficulty in finding qualified drivers

Rail• Lost ground to motor carriers• Heavy bulk goods over long distances

• Double stack containers• Some disadvantages-less dense than road networks

Water

• Importance of the development and adoption of the ocean container to the global economy

• Shortage of capacity at ports• Lack of intermodal rail and storage capacity t facilitate movement of containers out of the port once they are unloaded from the vessel

Air• Used to move small high value goods

• Goods that perish very quickly• Small very expensive like diamonds or microprocessors

• Competition is fierce• Can benefit from containerization

Pipeline• Coal,oil, and natural gas• Freight is protected from theft as most pipelines are located underground

• Freight can be moved continuously

International Transportation Intermediaries

• Scores of documentation requirements differ by countries involved and even the specific freight or companies conducting the transaction

• Incoterms-international commercial terms of sale-specify which service charges are paid by the buyer and which are paid by the seller. They also designate which party is responsible for the risk of loss of the shipment at each stage of the journey

Consultants to help improve transportation efficiency and consolidate shipments

• International Freight Forwarders

• Non-Vessel operating common carrier

• Customs brokers• Export Management Company• Export Trading Company• Export Packer

Global Warehousing and Distribution Management

• Facility location and methods of distribution to the final customers

• Firms desiring to serve a foreign market will usually establish a distribution presence if not a manufacturing presence so that customers can be served optimally

• tariffs and duties;• nontariff trade barriers;• exchange rate;• corporate income tax in the foreign country;• transportation time and cost for supply shipments and for distribution to customers;

• convenient access to transportation rights-of-way such as highway junctions, airports and seaports, railroad switching terminals, and rivers or lakes;

• inventory cost for goods stored in the distribution centers;

• availability and cost of skilled workers for the facility.